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Federal Judges Are Likely To Force Changes In How Price Anchors Are Selected

May 26, 2013 12:30pm

When a U.S. Appellate panel ruled last week that a retailer can indeed be sued by shoppers for publicizing a false anchor price (such as "this item is now $50, original price of $425" even though that item never sold for $425), it created a frustrating Catch-22 for chains. Are chains supposed to back off false comparisons and suffer JCPenney's fate? Shoppers get angry when such false comparisons are taken away, and they also get angry when they are used. (Fickle folk, these shoppers.)

Like all matters legal, this gets a lot more complicated. What constitutes a legitimate anchor price? Does the manufacturer's suggested retail price do the trick, even if the retailer never used—nor even planned to use—that MSR price? Does it have to merely be offered at that price? Will five minutes suffice? An hour? Is a week necessary? What if it was only offered on one channel, such as mobile? Does that make it a legitimate anchor for in-store and on your website? If some competitor has been selling it at that higher price, does that make it a legitimate anchor?

Speaking of selling, is that—or should it be—a requirement? If you offered it for $10 million for a week and no one even tried to buy it, is it legitimate to say that it's now $5,000, marked down from $10 million? In short, does it have to sell at that higher price for it to a legitimate comparison? How many times does it have to sell at that price for it to pass legal criteria?

The other element the court addressed was buyer belief and reliance. In other words, in that "$50 versus $425" example, would that shopper have honestly not paid $50 for that product had the $425 price not been there? The shopper's loss alleged in that case relies on the assumption that he never would have paid as much as that $50 had the $425 anchor not been dangled in front of him. It's hard for a retailer to argue that such shopper thoughts are not real, given the widespread use of the false anchor tactic.

To be clear, the appellate panel didn't suggest that the shopper was right about these issues, but that the lower court was wrong to have dismissed it without exploring the issues more fully. The chain at issue happened to be Kohl's (NYSE:KSS), but the issues being debated will apply to any retailer. The debate in the immediate case dealt with California laws, but given that the panel is federal and that quite a few states have laws almost identical to California's, this case is certainly not limited to Kohl's nor to only California stores.

The federal panel acknowledged that this is far from unusual, which simply reinforces how huge an impact this could have on retail.

"Most consumers have, at some point, purchased merchandise that was marketed as being on sale because the proffered discount seemed too good to pass up. Retailers, well aware of consumers' susceptibility to a bargain, therefore have an incentive to lie to their customers by falsely claiming that their products have previously sold at a far higher original price in order to induce customers to purchase merchandise at a purportedly marked-down sale price," the panel ruled.

The key question is whether shoppers can truly claim to have been ripped off if they see a product, examine it and decide that the price tag—let's say $50—is worth the product. As long as they paid $50 and received exactly what they were promised for that $50, it's hard to see where the loss to the consumer is. This is triply true because there are few consumers left who have yet to figure out that the price being compared is rarely a legitimate comparison.

The panel rejected that argument, partly because the California Supreme Court "has previously rejected a similar argument, holding that a consumer has lost money or property so long as false advertisements induced him to buy a product he would not have purchased or to spend more than he otherwise would have spent," the panel wrote.

In the Kohl's case, the shopper had his own metric for determining the legitimacy of an original/regular price: "prevailing retail market prices during the three months immediately preceding the publication of the advertisements in question." This gets into an even more amorphous area. It's no longer what a chain is selling a specific SKU for, but it's what an unspecified list of rivals is selling something similar for? Who is to say what is sufficiently similar to be calculated? If the product is one that is sold identically through many chains—Kellogg's Cornflakes or a specific Sharp microwave oven—that could work, but how does that speak to more customized products?

Even worse, that doesn't factor in brand clout. A top jewelry chain could sell a prestige brand of watch for more than perhaps Macy's could. If Cartier, Tourneau or Tiffany's sold a necklace for $5,000 and then discounted it to $3,000, is it legitimate to dismiss that $5,000 price because Macy's was selling it all along for $3,500? Shouldn't the anchor legitimately be based on actions that specific chain took, such as what price was advertised and what it actually sold for?

Price anchors work and always have worked. They create the perception of a bargain. The easiest way to defend against these imminent decisions it to simply make the anchors legitimate. If an item is actively being sold at a specific price (the volume of sales should be meaningful), then and only then should it be used as an anchor. The premise of an anchor is that a shopper wants to pay a lot less than a neighbor paid for the identical item. I'd submit that a decent number of sales is needed for an anchor. The plus side: Those decent numbers of sales should pretty much protect your chain from the false-advertising claim.

Want the most protection? Decide on precise criteria for your anchors and then publish them to your customers. Post them prominently in stores (OK, maybe you use really small print, but still…), post it on your Web and mobile sites, and include that fineprint in every receipt you print in-store and e-mail online. Do that, and these kinds of legal changes will be irrelevant. As long as make your anchors exactly what you're telling your customers they are, there is no danger of misleading anyone.